India Sri Lanka economic links de-railed by protectionism

July 28, 2008 (LBO) – The developing discourse on a trade agreement with India is disturbing. The proponents of the manjokka economy, led by experts on plug removal and tooth extraction, are framing the debate.

The level of naiveté displayed by those who should know better, including those who write newspaper columns and the quick surrender by the Minister of International Trade, a man whose intelligence and eloquence cannot be questioned, bodes ill for the future of this little island.

Missing the bus?

Little island. About the size of Greater Mumbai. Not of great consequence to India. These are the central points that are missed by the commenters (with the honorable exception of Saman Kelegama of the IPS). Figure 1 gives the data for 2003; by now, the Metro Mumbai economy may have overtaken Sri Lanka’s.

In the big picture, India can let Sri Lanka be. They have done this once, after the IPKF pulled back due to the stupidity of our leaders. Were lives saved? Was there peace with honor?

Or does Mahinda Rajapaksa who then protested the 13th Amendment that the IPKF was trying to help implement, now see “the Indian solution” (less the North East merger) as THE solution?

In 1987, there were plenty of reasons for India to intervene. Paramilitary groups coddled by the RAW were running riot in Tamilnadu. Refugees were in their thousands. Sri Lanka was affecting Tamilnadu politics and upsetting the equilibrium in Delhi.

No such conditions exist for the alleged intervention to dominate Sri Lanka economically. India is of paramount importance to Sri Lanka, but not vice versa. India is in the top three of everything with us: imports, exports and investment. We are not in the top 10 in any one of these categories for India. Exceptions are international flights into India (an early result of the CEPA negotiations) and tourists into India.

If our weak-kneed politicians keep postponing the already late agreement (it was originally planned to be signed in 2004), India may lose interest. They have signed with Singapore; CEPAs with Japan, South Korea, ASEAN and the European Union are in progress. With these heavy hitters taking up Indian attention, little Sri Lanka may fall by the wayside.

Fix the problems of FTA first?

This is a favourite refrain of the naysayers. A trade agreement is a complex matter. No one can get it right the first time. CEPA is how we fix the problems of the FTA. As I understand, the CEPA will be phased in, and lots of monitoring activities are built into the implementation schedule. This will allow for fine-tuning.

No need for an agreement?

“We trade with Bangladesh without an agreement. We have an agreement with India but we get hassled by low-level flunkies.” That is the second main argument.

Yes, there are well-documented problems of non-compliance with FTA provisions by low-level officials. The FTA was the very first bilateral trade agreement for both countries. It would be totally surprising if there were no teething problems. It would also be surprising if these problems were to continue unabated as familiarity increased.

The real solution to this problem is a robust dispute-settlement procedure. Not having seen the final text, I cannot say whether the dispute-resolution provisions are adequate, but I would be most surprised if the negotiators did not include a chapter. This is standard operating procedure in trade negotiations.

The whole point of trade agreements is to provide frameworks and reduce uncertainty. Things may be fine in Bangladesh today, but what happens when the “good” Customs Chief is transferred? What happens when Sri Lankan exports grow to levels that pose a threat to powerful interests? Economic relations with India are too important to be left to ad hoc arrangements.

Not transparent

Consultations with stakeholders have been ongoing since 2002. The last consultation gave lots of details; had all the main chambers represented and even had a long and full write up in the papers, even now accessible through the web: http://www.island.lk/2008/07/14/business4.html. Even pontificators from London can read online newspapers, one assumes.

Ideally, the text of the agreement to be signed would be public. But both countries share an administrative culture that is excessively secretive. I surmise India would not be happy if Sri Lanka were to release the text unilaterally. India has a Freedom of Information law; Sri Lanka does not. It would be interesting to see if someone uses the Indian FOI Act to extract the final text.

One way out of the impasse would be for the articulate Minister of International Trade to give a couple of speeches in the subject; engage in a TV debate with the plug specialist and/or the retired dentist. We cannot have stealth trade liberalization with our most important economic partner.

In Canada, Brian Mulroney fought and won a general election to get the free trade agreement with the United States approved. We need that kind of political courage now. Technocrats cannot be the sole defenders of CEPA.

Benefits

We have already seen the benefits of CEPA. For a long time, air travel between Sri Lanka and India was a festering sore. You had to reserve, confirm, reconfirm and you would still get offloaded. Once I was told that I was 77th on the wait list. When I asked Air Lanka why they didn’t put in an extra plane, they said they were not allowed, under the rules.

Now, SriLankan runs more flights into India than any other carrier. Jet provides competition. Pretty much no one gets offloaded. At one point, over 40 percent of SriLankan’s passengers through Colombo were transit passengers.

All these were a result of a policy change announced by then Prime Minister Vajpayee upon accepting the Joint Study Group’s report along with then Prime Minister Wickremesinghe, whose idea it was to open the routes to the Indian private airlines.

The Joint Study Group report makes multiple references to Sri Lanka becoming a services and logistics hub for South Asia. This was a sea change from the previous position which had Indian bureaucrats writing lengthy internal memos on the need to avoid trans-shipment through foreign ports. Guess what that kind of thinking would have done to Colombo (where 70 percent of containers are being trans-shipped from/to India)?

It is also worth emphasising that the Indian negotiators have not insisted on symmetry at any point. Under the FTA, 1,180 tariff lines remained on the Sri Lankan negative list (excluded from the provisions of the FTA) in 2007. On the Indian side the number was 429. Among the items on Sri Lanka’s negative list were agricultural and livestock items; rubber products; iron and steel; machinery and electrical goods. India’s negative list included garments, plastic goods and rubber products.

But even with garments and tea, India allowed capped trade. The most important thing to remember is that agriculture was kept out of the CEPA (and was out of the FTA) despite the fact that India sells a lot of agricultural products to Sri Lanka. Exclusion of agriculture was a central element of the Sri Lankan strategy because it was felt that tariff-free agricultural imports from India could wipe out higher-cost Sri Lankan producers.

These are the stories Professor Pieris must tell, if he is not to be held responsible for making Sri Lanka miss the bus again.

India is the most dynamic economic engine in the region. It is on everyone’s radar screens. It is an emerging world power. We are fortunate in our location and our historical good relations with India. We must nurture and develop this central relationship. The way to do it is by engaging with India, not by getting pushed off track by fear-mongering plug specialists and knee jerk protectionists.

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